The Becker-Posner Blog

The Summers Controversy and University Governance

We return this week to the Larry Summers controversy, not to rehash the points in the earlier postings and comments, but to consider the larger issues of university governance that the controversy raises. On these larger issues, Becker and I have some significant disagreements. The “case” against Summers made by his faculty critics is a four-legged stool: he had the temerity to challenge the absenteeism of a prominent faculty member, Cornel West, who as a result resigned in a huff; he is peremptory, perhaps even rude and boorish, in his dealings with faculty; he refuses to consult faculty on administrative matters, such as the expansion of the campus into Alston, across the Charles River from the traditional campus; and, most notoriously, he challenged the conventional left-liberal view that any underrepresentation of a group in a prestigious activity (e.g., women on the science faculties of Harvard) must be due to discrimination rather than to preferences or capabilities. For these actions, Summers—the most exciting and dynamic president that Harvard has had since James Conant—has been (or at least has felt) compelled to undergo a humiliating course of communist-style “reeducation,” involving repeated and increasingly abject confessions, self-criticism, and promises to reform. He has been paraded in a metaphoric dunce cap. Why has he consented to participate in this ritual of self-abasement? Why has he refused to face down his critics? To appreciate the sheer strangeness of his situation, imagine the reaction of the CEO of a business firm, and his board of directors, if after the CEO criticized one of the firm’s executives for absenteeism, ascribed the underrepresentation of women in the firm’s executive ranks to preferences rather than discrimination, dealt in peremptory fashion with the firm’s employees, and refused to share decision-making powers with them, was threatened with a vote of no confidence by the employees. He and his board would tell them to go jump in the lake. But of course there would be no danger that the employees would stage a vote of no confidence, because every employee would take for granted that a CEO can be brusque, can chew out underperforming employees, can delegate as much or as little authority to his subordinates as he deems good for the firm, and can deny accusations of discrimination. If, however, for employees we substitute shareholders, the situation changes drastically. The shareholders are the owners, the principals; the CEO is their agent. He is deferential to them. Evidently the Harvard faculty considers itself the owners of the institution; Summers appears to agree, as does Becker. I disagree. The economic literature on worker cooperatives identifies objections to that form of organization that are pertinent to university governance. The workers have a shorter horizon than the institution. Their interest is to get as much from the institution as they can before they retire; what happens afterwards has no direct effect on them unless their pensions are dependent on the institution’s continued prosperity. That consideration aside (it has no application to most professors' pensions), their incentive is to play a short-run game, to the disadvantage of the institution—and for the further reason that while the faculty as a group might be able to destroy the institution and if so hurt themselves, an individual professor who slacks off or otherwise acts against the best interests of the institution is unlikely to have much effect. All this is true of Harvard. The faculty are interested primarily in their own careers, and what is good for their careers and what is good for Harvard are only tenuously connected. The individual faculty member who denounces Summers knows that his denunciation is unlikely to bring about Summers’s departure, and even if it was decisive, and even if Summers is the best president that Harvard could find, an inferior replacement would be unlikely to do so much harm to Harvard as to have a discernible impact on the career of the denunciator. What is more, that replacement might be more inclined to kow-tow to faculty, enhancing their careers at the expense of the long-run health of the institution. Apart from the misalignment of faculty and university interests, faculty at research universities, like intellectuals generally, tend not to be responsible participants in collective action, such as university governance. The academy does not select for people who have interpersonal skills, because most academic research is either solitary or conducted in groups of two or three, though there are exceptions, primarily in the hard sciences. In addition, faculty are highly specialized, many in fields wholly unrelated to the financial and other practical questions that loom large in a university as large and affluent as Harvard. Universities are increasingly complex enterprises. Harvard has a multibillion-dollar annual budget. It is ludicrous for English professors to think they have a useful contribution to make to decisions involving budgetary allocations, building programs, government relations, patent policy, investment decisions, and other key dimensions of modern university governance. They are in no position to balance Summers’s strengths in these areas with what they consider his weaknesses in relations with faculties, or his ideological views that they find offensive. Because universities are organized as nonprofit entities, there are no shareholders, and hence no owners in the conventional sense. As a practical matter, the university’s trustees are the owners; they control the endowment and the other assets of the university and they appoint the president, who in turn appoints the administrative staff of the university. The trustees’ interests are better aligned with the university’s interests than the faculty’s are. The trustees do not have a personal financial stake in the university’s success, but the position of a trustee of a major university is prestigious and even visible, and trustees who botch their job will experience embarrassment and loss of reputation. Of course, as part timers and outsiders to academia, the trustees cannot actually manage the university. Nor do they try. Their principal function, besides general supervision and assistance in fund raising, is to hire a president, and to fire him if he performs badly. (So they are much like the board of directors of a business firm.) That is a limited function which a board of trustees should be able to discharge competently. The president is the CEO and he has both a reputational and a financial stake in the success of the institution. The president and his administrative staff, not the trustees—and not the faculty—should manage the university. The role of the faculty should be teaching, research, and appointments (subject to override by the president or provost) within their field of academic specialization. So I would like to see faculty think of themselves as employees and leave governance to the university’s president. (Another reason for this conclusion is that preoccupation with governance is a distraction from teaching and scholarship, and so reduces faculty output. In doing so it compounds the bad effects of academic tenure, an institution that reduces the productivity of many academics.) Isaac Rabi, whom Becker quotes in his comment, not only was far above the mean of academics, but was also a person of great practical sense. If our universities were composed of Rabis, I would be happy with faculty goverance. They are not. Against this Becker argues, first, that competition among universities will assure good performance regardless of the governance structure and, second, that a comparison of American with foreign universities shows that our universities must be doing something, or rather a lot of things, right, because our universities are the world’s best. Competition is indeed a powerful force for efficiency, but interuniversity competition is blunted by a variety of factors, including the lack of a profit incentive and the difficulty of evaluating a university’s output. I agree that our universities are the best in the world, but comparisons of this sort are invitations to complacency. (If the Harvard trustees were complacent, they wouldn’t have appointed Summers president!) When the United States had monopolistic regulation of the telephone industry, as it did until the breakup of AT&T, we had the best telephone system in the world. When we lost the war in Vietnam, we had the best armed forces in the world. When the Civil Aeronautics Board administered an airline cartel, we had the best airlines in the world. We have the best universities, but I believe that they would be even better if they were governed differently. My belief is supported by the fact that American universities are evolving in the direction of greater conformity to the principles on which private businesses are run. The time has come to retire the faculty slogan “we are the university.”

Comment on University Governance-BECKER

I discussed earlier the factors determining why far fewer women than men are highly successful in science and other fields. At that time, Larry Summers’ controversial statement on this topic was not yet publicly available. It is now, and it is an excellent and balanced statement that should not cause offense to any thinking person, even though some might legitimately disagree. As in my blog discussion, he gives greatest priority to the time commitments necessary to be highly successful. Since women with children have much less time available to concentrate intensely and for prolonged stretches on their work, a disproportionate number of highly successful women do not have children. He also notes that universities and companies have a competitive advantage if they do not discriminate against able women. As Harvard’s president, Summers has shown vision, enormous ability, and strength, qualities typically lacking in university presidents, with the exceptions of Edward Levi at Chicago, Gerhard Casper at Stanford, and a few others. If allowed to persist in his endeavors, he will go down as one of the great university presidents of recent decades. Although I wanted to get these comments off my chest, they are also relevant to university governance, our topic this week. Posner argues against the view that faculties should be running universities. He points out several problems with such a system, including that professors pursue their own narrow interests instead of the universities long-term goals, that professors are not selected for interpersonal skills, and that universities have become too complex to be run by a faculty collective. Strangely, he comes down in favor of university trustees as having interests that are better aligned with those of universities. Yet my experience is that trustees typically know little about, and generally do not have much interest in, the universities they oversee, they are intimidated by professors, are not very brave in their trustees’ role, generally go along with whatever is presented to them by university administrations, and very seldom force a university president to quit. Still, I believe the only satisfactory way to evaluate how universities (or businesses) are run is by their success or lack of it in the long run. Although there is no simple way, like profitability, to judge universities, there is an effective way to judge a university system. The American college and university system is widely accepted as the strongest in the world. This is why American universities are filled with students from abroad, including those from rich nations with a long history of higher education, like Germany and France. I conclude from this that the American university system must be doing many things right, at least relative to the other systems. And what is right about this system is rather obvious: several thousand public and private colleges and universities compete hard for faculty, students, and funds. That the American system of higher education is the most competitive anywhere is the crucial ingredient in its success. Competition tends to weed out the inefficient and the ineffective, regardless of whether competing enterprises are private profit –maximizers, as are most business firms, private non-profits, as are many American universities, or public non-profits, as are the majority of universities. In any industry, including the education industry, many different approaches are tried, as in the Robert Hutchins great books approach to undergraduate education at the University of Chicago. Many of these approaches fail, as the great books approach failed because it turned out to be a poor way to teach science, economics, and many other subjects. The basic effect of competition is that only the successes tend to survive in the long run. What survives in a competitive environment is not perfect evidence, but it is much better evidence on what is effective than attempts to evaluate the internal structure of organizations. This is true whether the competition applies to steel, education, or even the market for ideas. In particular, this is the main reason why I favor education vouchers, for it is one significant way to bring greater competition into the k-12 education system. Posner rightly notes that professors typically run American universities. I may have told the story in an earlier comment about Dwight Eisenhower, then the newly installed president of Columbia University, who gathered its faculty together. He indicated that he wanted to meet the employees of Columbia. Isaac Rabi, the great Columbia University physicist, is said to have corrected Eisenhower: ”Mr. President, we are not the employees of this university, we are Columbia University”. Given the effectiveness of the American higher education system, its governance, including the role of faculty, is probably on the whole along the right lines. Some literature has even shown that an industry composed of workers cooperatives, Posner’s analogy to faculty-run universities, in a competitive environment tends toward efficiency because these cooperatives have to bid against each other, and against other industries, for labor and capital. Much of that literature would apply to universities run by professors, and to other aspects of the structure of American universities. Yet enterprises in even the most competitive industry often appear to be inefficient when looked at under a microscope. This is why the many best sellers every year on how to improve the management of American companies before long pass into the market for shredded paper. Similarly, the reaction of some faculty at Harvard to Summers’ remarks at the labor conference on women is foolish, but that should not be used to judge the efficiency of the system of American higher education. I am dubious about proposals to improve a competitive system that is working. The American university system is competitive and it is working well, at least judged by its ability to continue to attract the best students from abroad, that few Americans go abroad for advanced degrees, and by the current efforts to imitate the American system of higher education in many other countries. We should not be complacent, but that is pretty effective evidence in its favor, including the approach to governance.

Immigration Reform--Posner's Response to Comments

This was, as usual, a stimulating set of comments. I cannot respond to all of them, but I will try to respond to some and in so doing clarify my original proposal. It is apparent that a number of the commenters misunderstand my proposal. I accept responsibility for not having explained it adequately; in addition, I modify it slightly in this response, in light of the comments. A number of comments suggest that Becker's and my proposals are anti-immigrant or anti-poor. That is incorrect. As Becker explains in his response, his proposal would facilitate immigration by unskilled workers--as would mine, had it not been for my reference to IQ, which I retract below! Both of us contemplate that our proposals would lead to greater immigration. That in turn would tend to redistribute wealth from rich to poor, because the vast majority of immigrants (other than some asylum seekers) raise their standard of living by coming to the United States. This, by the way, was surely true of the people who were able to immigrate to America in the eighteenth century solely by virtue of the institution of indentured servitude. Indentured servitude (which must not be confused with slavery) is a method of commitment that, like a mortgage, enables a person to obtain an economic advantage that he could not obtain otherwise. Unfortunately this is a point that is very difficult for people not steeped in economic thinking to grasp. But try! One comment misdescribes my proposal as one "to sell immigration rights." The only sale component concerns immigration slots auctioned to rich people who, because of age or health, would be unlikely to be productive citizens; the auction price would compensate the rest of us for supporting them in their sickness and old age. I realize that I created the impression that I wanted immigration officials to assess whether each individual prospective immigrant would be likely to make a net contribution to the American economy, or to American society more broadly, as a condition of permitting him to immigrate. That was error; it would be an excessively costly, perhaps indeed a completely infeasible, undertaking. What I should have said is that the government should adopt a few simple criteria, perhaps limited to age, health, and criminal history, which could in most cases be readily determined, to screen would-be immigrants, and couple that with a residency requirement for welfare benefits (see below). I should not have mentioned IQ, since as Becker points out we need additional unskilled as well as skilled workers and since it is difficult to design IQ tests that will yield comparable results for persons of different linguistic, cultural, and socio-economic background. Congestion and pollution externalities are potentially strong objections to high levels of immigration, but they should affect policy at the level of deciding whether to place some overall limit on the annual immigration rate; they cannot be used to screen individual applicants. Employability is important, but age and health are proxies for it; and disentitling new immigrants to social services for a limited period of time (probably no more than a year or two) is a way of discouraging immigration by workers who may be young and healthy and have a clean criminal record yet who for one reason or another are not attractive to U.S. employers. The purpose of this temporary residency requirement for entitlement to social benefits is not, as one comment asserts, to curb immigration because of the welfare state; it is to discourage free-rider immigrants. To repeat, the overall effect of our proposals would be to increase the amount of immigration. Moreover, even though the present patchwork of immigration laws is inefficient, I believe that the net effects of immigration, today as in the past, legal and illegal, on American society are positive, consistent with the study by Smith and Edmonston cited in one of the comments. Speaking of the immigration law patchwork: an excellent comment, diffidently offered by an undergraduate, asks what features of the present system of immigration rights is my proposal intended to replace? All of them? No; I said that I thought we should continue to grant asylum to victims of persecution. But I did not comment on the other grounds on which people are allowed to immigrate under existing law, such as national quotas, family reunification, lottery, and special skills. Although family reunification has obvious appeal, I cannot think of a good reason to specify immigration quotas by nation. A lottery would make sense only if the number of people who passed the screening test that I have proposed exceeded some overall ceiling on immigration derived from concern with congestion or pollution externalities; in that event, a lottery would be a cheap way of equilibrating applications to openings. A special-skills exception would be superfluous (and is costly to administer) if the screening approach were adopted, because almost everyone who had special skills would pass the test. One comment contains an intriguing hint that might be elaborated as follows: illegal immigration, being costly, tends to filter out would-be immigrants who are either faint of heart or don't have a really strong desire to live in the United States, while letting in would-be immigrants who are daring, ingenious, and optimistic about their chances for success in the U.S., albeit who also may have a below-average commitment to legality. On balance, illegal immigrants may constitute a desirable class of immigrants. If this is correct, it supports the Bush Administration's amnesty proposal.

Response on Sale of Rights to Immigrate-BECKER

A lot of comments, and many are of high quality, including some that disagreed. I had expected the clear majority to be opposed, and on this at least I proved right! Once again some of the discussion cleared up various issues, but some points need to be highlighted. We now have severe restrictions on the number of immigrants allowed in legally. Although my $50,000 figure was just an illustration, I believe that more, not fewer, immigrants would be coming even with this price than under the present system since ALL applicants who met certain simple criteria would be accepted. Economic analysis proves that there certainly exists a positive price (and I believe a significant one) that would have a larger number of immigrants than under the present quota system. Some of you complained about the red-tape involved now in immigrating to the US. I believe the immigration service is one of the most arrogant of all government agencies. They have the power to say “take it or leave it” since they are rationing a valuable asset, entry permits. Unlimited entry at a fixed price will not only raise the number of immigrants-if the price is not too high-but would drastically cut all the time-consuming and annoying hassle involved in immigrating. And it might even make immigration agents a little pleasant since immigrants would be paying for the right to come. Some of you missed my stress on overcoming the financial difficulties of paying a high fee by encouraging loans to immigrants from private banks. They would be encouraged not by government insurance, but by giving them the many of the other privileges now available to those collecting on student loans, such as that immigration loans would not be dischargeable by bankruptcy, and that earnings could be garnished if some immigrants are in arrears. With such loans available, the unskilled will not be priced out of the immigration market. They would have to put together perhaps $5000 as a down payment, or about 1/3 of the gross earnings of an unskilled worker in the US. Many unskilled individuals could pool family resources to do that, as they did in earlier times when transportation costs to the US were so much larger than they are now. Recall that the cost of transportation in the 18th and 19th century to the US by boat from Europe was a significant fraction of the earnings during the first year in the US of the many low skilled immigrants who managed to come. The term “payback period” is technical, and only is a way of describing how many years before the after-tax gain in earnings from immigrating covers the cost of immigrating. It does not mean they would have to pay the loans back in a few years; I agree that would be very difficult for low skilled individuals. My proposed loans would be longer term, as is the case with student loans. I am confident that the absolute number of unskilled immigrants (as well as the total number of immigrants) who would enter under my fee system would exceed the number entering under the present system since unskilled applicants are discriminated against under the present quota system. So it is erroneous to call my proposal anti-immigration, or even anti unskilled immigration. I am certainly pro immigration, and I surely believe unskilled and other immigrants have contributed, and will continue to contribute, a lot to the American economy and society. I also believe, however, that countries benefit more from having immigrants who make a commitment to stay, as 19th century immigrants to America did. My proposal works toward selecting more committed immigrants. Of course, they would still be free to return if they decide to do so, but the US gains more from their staying-if they are productive, etc- than it gains from whatever influence they bring back upon returning to the countries they come from. Some of you complained that making immigrants pay is like bringing in indentured servants. Do you believe they are better off if they are not allowed in at all, which is the present system? Or do you believe students are “indentured” because many of them have large loans when they finish school? They surely are a lot better off than if limited financial resources prevented them from going to college at all! Some of you doubt whether some immigrants come at least in good part to take advantage of medical, welfare, education, and other benefits. Although we need more evidence on this, there are a few studies showing that these entitlement –type benefits do affect immigration by poor individuals and families- see for example, an article by Terra McKinnish in the Winter 2005 issue of the Journal of Human Resources. Auction or credit systems are in the same spirit as my proposal. In all cases, it is necessary to decide either the price to be charged immigrants, or the quantity to be auctioned or credited off. With full information about supply and demand curves, they are identical in terms of incidence, although credit systems allow other to capture the revenue. Why is that desirable? Many of you raised a challenging question that I only briefly addressed: would my system increase or decrease the number of persons who would try to come illegally? On the one hand, they would escape paying the entry fee, so that would obviously be one force increasing the number entering illegally. But there is much more to the answer than that. Under the present system they do not have the right to come legally, so theyhave to try to come illegally if they want to come. I would give them a legal immigration alternative, and I believe many would choose that alternative since there are huge employment and other advantages of being here legally rather than working underground. Moreover, we would have the additional resources to add to patrols and others who are policing the numbers trying to cross illegally, or who overstay their visas. In addition, I believe attitudes toward illegals would harden since, unlike the present system where they are excluded from coming, they could be coming legally. Some of you-not all!- confused the effect of charging an entry fee on the number of illegals in a system where they could have come freely, with the actual present system where the only way they can come is to come illegally. So I am pretty sure the number coming illegally would go down, but I agree that is not certain. Much more could be said, but I believe I responded to the main points. My apologies that I did not have time to address all the relevant comments. Perhaps we will return to this topic in a future blog since our pieces stimulated so many good responses.

Sell the Right to Immigrate-BECKER

Rich nations are facing enormous pressure to increase the number of immigrants because of their sharp limits on the number of legal immigrants accepted, and the huge numbers who try to cross borders illegally. This immigration pressure stems in major part from the very large gap between the earnings of workers at all skill levels in the United States, Western Europe, and Japan compared to the rest of the world. In addition, low birth rates in the developed world create excellent opportunities for young persons from poorer nations, and travel between nations has become much cheaper. The United States, the leading destination for immigrants, uses quotas that give preference to family members of persons already here legally, to applicants with greater skills, to persons who applied earlier, and some other criteria. Since I am a free-trader, readers might expect my preferred alternative to the present system to be 19th century-style unlimited immigration. I would support that if we lived in the 19th century world where government spending was tiny. But governments now spend huge amounts on medical care, retirement, education, and other benefits and entitlements. Experience demonstrates that in our political system, it is impossible to prevent immigrants, even those here illegally, to gain access to these benefits. I believe that with unlimited immigration, many would come mainly because they are attracted by these government benefits, and they would then be voting to influence future government spending and other public policies. Given these realities of free immigration, the best alternative to the present quota system is an ancient way of allocating a scarce and popular good; namely, by charging a price that clears the market. That is why I believe countries should sell the right to immigrate, especially the United States that has so many persons waiting to immigrate. To illustrate how a price system would work, suppose the United States charges $50,000 for the right to immigrate, and agrees to accept all applicants willing to pay that price, subject to a few important qualifications. These qualifications would require that those accepted not have any serious diseases, or terrorist backgrounds, or criminal records. Immigrants who are willing to pay a sizeable entrance fee would automatically have various characteristics that countries seek in their entrants, without special programs, point systems, or lengthy hearings. They would be younger since young adults would gain more from migrating because they would receive higher earnings over a relatively long time period. Skilled persons would generally be more willing to pay high entrance fees since they would increase their earnings more than unskilled immigrants would. More ambitious and hard working individuals would also be more eager to pay since the U.S. provides better opportunities than most other countries for these types. Persons more committed to staying in the United States would also be more likely to pay since individuals who expect to return home after a few years would not be willing to pay a significant fee. Committed immigrants invest more in learning English, and American mores and customs, and become better-informed and more active citizens. For obvious reasons, political refugees and those persecuted in their own countries would be willing to pay a sizeable fee to gain admission to a free nation. So a fee system would automatically avoid time-consuming hearings about whether they are really in physical danger if they were forced to return home. The pay-back period for most immigrants of a $50,000 or higher entrance fee would generally be short-less than the usual pay-back period of a typical university education. For example, if skilled individuals could earn $10 an hour in a country like India or China, and $40 an hour in the United States, by moving they would gain $60,000 a year (before taxes and assuming 2000 hours of work per year). The higher earnings from immigrating would cover a fee of $50,000 in about a year! It would take not much more than four years to earn this fee even for an unskilled person who earns $1 an hour in his native country, and could earn $8 an hour in the U.S. These calculations might only indicate that $50,000 is too low an entrance price, and that an appropriate fee would be considerably higher. But with any significant fee, most potential immigrants would have great difficulty paying it from their own resources. An attractive way to overcome these difficulties would be to adopt a loan program to suit the needs of immigrants who have to finance entry. One could follow the present policy toward student loans, and have the federal government guarantee loans to immigrants made by private banks. However, I objected to that program in a January 9th entry in this blog, and suggested instead removing the federal guarantees while retaining that education loans are not dischargeable through personal bankruptcy. The same approach would work for immigration loans since these are also investments in human capital. Of course, it would be difficult to collect from immigrants who return home, and that would lead to higher interest rates on these loans. But such forfeiture would be discouraged too if banks forced immigrants to make large enough down payments in order to get their loans. Countries that charge a sizeable fee would have an incentive to raise the number of immigrants accepted because they would bring in tax revenue that cuts the tax burden on natives. For example, one million immigrants per year who each paid $50,000 would contribute government revenue of $50 billion per year. Moreover, immigrants who would enter under a fee system would generally make little use of welfare or unemployment benefits, would pay hefty taxes on their earnings, and would tend to be younger and healthier. So the overall direct economic benefits from larger numbers of immigrants would be much greater than under the present admission system. This would help quiet anti-immigration rhetoric as it induces countries to take more immigrants. In addition, since anyone willing to pay the entry price could then legally immigrate, this approach should also cut down the number who enter illegally. Still, some persons will continue to try, especially if they want to avoid paying the fee, or only want to work for a short time in the United States. However, border and other immigration personnel would become more efficient in combating illegal entrants since they would have to deal with smaller numbers. It should become easier also to expel and even punish illegal entrants because they would get less sympathy from the American public than under the present system. After all, they usually could have entered legally, but tried to chisel out of paying. In summary, charging a fee to immigrate would raise tax revenue, increase the number of immigrants accepted, and also raise the quality of those accepted. It is a win-win situation for countries accepting immigrants, and for the vast majority of persons who would like to immigrate.

Immigration Reform--Posner Comment

I approach the issue of immigration reform (theoretical reform—neither Becker nor I are considering the political obstacles to radical changes in immigration law) somewhat differently. I begin by asking: why restrict immigration at all? The only answer I consider fully compatible with a market-oriented approach to social issues is that the immigrant might reduce the net social welfare of the United States, if for example he was unemployable or on the verge of retirement, or was a criminal, or was likely to require highly expensive medical treatment, or if he would impose greater costs in congestion or pollution than he would confer benefits, with benefits measured (crudely) by his income before taxes and by any consumer surplus that he might create. I assume that the welfare of foreigners as such does not enter into the U.S. social welfare function; but immigrants who create net benefits in the sense just indicated contribute to the strength and prosperity of the nation. The problem of the “undesirable” immigrant—the immigrant who wants to free ride on the services and amenities that the United States provides its citizens—could be solved by means of a two-stage process. In the first stage, the prospective immigrant would be screened for age, health, IQ, criminal record, English language capability, etc.; the screening need not be elaborate. If the would-be immigrant “passed” in the sense that he seemed likely to add more to U.S. welfare than he would take out, he would be admitted without charge. If he flunked the screening test, an estimate would be made of the net cost (discounted to present value) that he would be likely to impose on the U.S. if he lived here and he would be charged that amount for permission to immigrate. An alternative, less revolutionary, approach to screening out free-rider immigrants would be, first, to deny immigrants access to Medicaid and other welfare programs until they had lived in the United States for a significant period of time, and, second, to auction off a certain number of immigrant visas to the highest bidders. Immigrants willing to take their chances without access to welfare programs (not that all access could be denied—no one could be refused emergency medical treatment on a charity basis), and immigrants willing to bid high prices in an immigration auction, would be likely to be productive citizens, in the first case, and to cover any costs they would impose on the nation’s health or other welfare systems, in the second case. Either the more or the less revolutionary alternative would impose significant transition costs, but that would be true of any radical change in immigration policy. The obvious cost (though not really a cost, rather a redistribution of income) would be that by increasing the supply of labor, an immigration policy that made it easy for employable workers to enter the U.S. labor force would reduce wages in the labor markets that the immigrants entered. A closely related but subtler consequence is that the downward effect of large-scale immigration on wages (a short-run effect, in all likelihood) would complicate the process of determining the correct fee to prevent free riding: an immigrant who might be able to pay his way at the existing wage level might be unable to do so if the wage level fell as a result of massive immigration. Similarly, congestion and pollution externalities might increase at an increasing rate with massive immigration, requiring a further adjustment in the fee charged the “undesirables.” Either approach seems to me preferable to a flat fee for all would-be immigrants. A flat fee would not do away with the need to screen, since some would-be immigrants might impose net costs on the U.S. that were greater than the fee; that is why Becker’s approach includes screening. The flat fee would exclude two types of immigrant that should, in a market-oriented approach, be admitted. One type would be “undesirables” willing and able to compensate the United States for the expected costs that they would impose--and so they would not be free riders after all; a very wealthy person on the verge of retirement would be an example of such an “undesirable.” The second type would be highly promising would-be immigrants (for example, persons with a high IQ) who for some reason—perhaps because they reside in extremely poor countries—simply could not pay the down payment on the fee. The fee would, it is true, increase government revenues, which may seem a plus. But it would do so at the usual cost of distorting the allocation of resources, in this case by excluding immigrants in the second class. I note two complications. First, it may be desirable to adhere to the current policy of granting asylum to foreigners who are escaping persecution, even if they do not seem likely to be able to pay or to earn enough to cover the costs they’ll impose on this country. My reason is not sentiment, but the fact that people who are persecuted tend to be either nonconformists or members of particularly successful minorities, and in either case they, or at least their children, are likely to be productive citizens even if their U.S. employment prospects are dim. Second, the United States in formulating immigration policy may have to worry about “brain drain,” and, what may be more important, “leadership drain,” from poor or unstable countries. For example, it would be highly unfortunate if all the Iraqis who have the ability and motivation to build a democratic, free-market society fled to the United States. Thus it may sometimes be in our national interest to exclude persons who would otherwise be highly desirable immigrants, in order to shore up forces or tendencies in their own countries that promote U.S. interests. However, I do not know how to mesh this concern with either my or Becker’s proposals.

Medicare--Posner's Response to Comments

There were, as usual, many very interesting comments. Let me try to respond to a few. One interesting suggestion is that an increase in demand for drugs, brought about by the Medicare prescription-drug benefit, will not, as I suggested, reduce average price by enabling the drug companies' heavy fixed investment in R&D to be spread over a greater output; the companies' patent monopolies will enable them to charge higher prices. This is possible but not certain. If average cost is not rising in output, an increase in demand will not lead to a higher price. If, however, the demand curve facing a monopolist becomes less elastic (meaning that a small increase in price will have a less depressing effect on output), then the monopolist will raise his price (unless, perhaps, his average costs are falling). That is a possible effect of the prescription-drug benefit: the benefit will slow the output reaction to a higher price. However, this effect will be offset to some and perhaps a great extent by the fact that many patented drugs have good substitutes (for example, the different antidepressants and painkillers), since different molecules having the same therapeutic effect are separately patentable. However, I grant that there may indeed be a price effect from the new benefit; one possible (and unlikely!) response would be to shorten the patent term for pharmaceutical drugs. Some comments suggest that compulsory health insurance and socialized medicine are, contrary to what I argued in my posting, the same thing. That is not so. Compare automobile liability insurance. It is compulsory in most (maybe, by now, in all) states, but since the insurance is written by private companies, it is hardly an example of socialized insurance. Similarly, one could have compulsory education laws but no private schools, and one would then not speak of socialized education. The analogy of medical to auto insurance was criticized in some of the comments on the ground that there is no upper limit to how much medical treatment one may need. But, similarly, there is no upper limit to the amount of damage you can do driving carelessly, yet it is possible to buy essentially unlimited liability insurance. The real difference is that medical insurance is more expensive--and would be much more expensive were it not for Medicare--than automobile liability insurance is because many more people require expensive medical treatment, especially toward the end of their lives, than cause serious auto accidents. Many comments suggest that medical insurance would be so expensive if it weren't subsidized by the taxpayer through Medicare that it would be unaffordable. But this is obviously wrong. Here the analogy is to life insurance. One can buy a very large life insurance policy cheaply at a young age because the insurance company invests the premiums and earns a return on the investment for many years before it has to pay out. Similarly, medical expenses tend to rise with age. Of course, young people have less disposable income than older--but one implication is that many older people, having high incomes, can afford to buy health insurance even though their premiums will be higher than if they had bought a lifetime policy when they were wrong. It is true that some, and probably many, people will not be able to afford health insurance, and I agree that, as a practical matter, they cannot be denied treatment just because they can't pay for it. So there will always be medical subsidies, just as there will always be subsidized pensions (social security). But why not make those who can buy health insurance, including health insurance for their old age, do so? One attractive method of subsidy, which I borrow from the automobile insurance example, is to require each insurance company to insure, at premiums only moderately above the market level, the individuals who because of poor health cannot afford to buy health insurance at market rates. The suggestion that you cannot deny, medical treatment to someone who refuses to buy health insurance is also true, but you can punish him for not buying it, just as we punish people for not paying taxes. I like the suggestion that low deductibles in health insurance policies are actually cost savers because they encourage people to visit the doctor at the first sign of trouble, when the problem can probably be corrected at less cost than if they delay. However, this reasoning does not justify the low deductibles in the prescription-drug plan. They will just encourage pill popping.

Prescription Drugs and Medicare Reform--Posner

In 2003 Congress created a prescription-drug benefit program for persons enrolled in Medicare. It was estimated at the time that the program would cost the government $40 billion a year; a recent re-estimation, adding $30 billion a year, New York Times, has elicited proposals to curtail the benefit. Given Medicare, I do not think that there is a principled objection to including a prescription-drug benefit in it. Suppose Medicare were limited to hospital treatment. Then critics would say, that’s absurd—it will only impel people to get hospital treatment that would cost society (though not the patient) less in a non-hospital setting. It is similarly questionable to exclude prescription drugs from Medicare coverage. Drugs are substitutes for other forms of medical treatment in many situations; therefore excluding them from coverage will induce people to seek other forms of treatment that may cost society more to provide. This means, by the way, that in calculating the net social cost of the prescription-drug benefit, the cost of other treatments for which drugs, with their cost to the patient reduced by the Medicare subsidy, will substitute should be subtracted. Concern has been expressed that increased demand for drugs may increase their price. That is unlikely. The principal cost of drugs is R&D. The manufacturing cost is slight; and therefore an increase in output brought about by increased demand should, if anything, reduce average cost and hence, given competition, price. The real issue is not the prescription-drug benefit but the overall cost of Medicare; currently (that is, without the prescription-drug benefit) that cost is running at almost $300 billion a year, which is about 3 percent of GDP. As a matter of economic principle (and I think social justice as well), Medicare should be abolished. Then the principal government medical-payment program would be Medicaid, a means-based system of social insurance that is part of the safety net for the indigent. Were Medicare abolished, the nonpoor would finance health care in their old age by buying health insurance when they were young. Insurance companies would sell policies with generous deductible and copayment provisions in order to discourage frivolous expenditures on health care and induce careful shopping among health-care providers. The nonpoor could be required to purchase health insurance in order to prevent them from free riding on family or charitable institutions in the event they needed a medical treatment that they could not afford to pay for. People who had chronic illnesses or other conditions that would deter medical insurers from writing insurance for them at affordable rates might be placed in “assigned risk” pools, as in the case of high-risk drivers, and allowed to buy insurance at rates only moderately higher than those charged healthy people; this would amount to a modest subsidy of the unhealthy by the healthy. Economists are puzzled by the very low deductibles in Medicare (including the prescription-drug benefit—the annual deductible is only $250). Almost everyone can pay the first few hundred dollars of a medical bill; it is the huge bills that people need insurance against in order to preserve their standard of living in the face of such a bill. But government will not tolerate high deductibles when it is paying for medical care, because the higher the deductible the fewer the claims, and the fewer the claims the less sense people have that they are benefiting from the system. They pay in taxes and premiums but rarely get a return and so rarely are reminded of the government’s generosity to them. People are quite happy to pay fire-insurance premiums their whole life without ever filing a claim, but politicians believe that the public will not support a government insurance program—and be grateful to the politicians for it—unless the program produces frequent payouts. If Medicare were abolished, the insurance that replaced it would be cheaper because it probably would feature higher deductibles; it is true that low deductibles are common in many forms of private insurance, such as automobile collision insurance, but I think it would be different in the case of health insurance simply because private health insurance for the elderly, with no Medicare crutch, would be very costly. The premiums would be much lower with high deductibles. I do not think, however, that total expenditures on medical care would decline markedly if Medicare were abolished. The reason is the enormous value that the vast majority of people place on longevity, good health, and freedom from pain and other physical discomfort. (And, given this value, why shouldn’t people who can afford to pay for it be required to do so rather than be subsidized by the taxpayer?) Pursuing a theme in my posting on social security, young people may be unwilling to pay for health insurance that will cover their expenses generously when they are old. But when they reach old age they will demand treatment whether they have insurance or not, and no one who has a serious medical condition is refused treatment in this country although he or she may have to settle for less-than-cutting-edge treatment in a public hospital. To prevent this free riding, a scheme of compulsory health insurance would have to require generous coverage in old age; and so aggregate health costs might not be much lower than under the present system, although with higher deductibles and copayments there would be some reduction. The explanation usually offered for the fact that a substantial fraction of the population has no health insurance is that these are unfortunate people who cannot afford health insurance. A better explanation is free riding. A person who has no assets lacks a compelling reason to buy medical insurance; he will be able to obtain medical treatment free of charge, as a charity patient. A person who does have assets but is young and healthy may prefer to gamble on not incurring large medical bills, rather than to subsidize the older and less healthy by being placed in the same insurance pool with them. However, these temptations to free ride provide an argument for compulsory health insurance rather than, as often argued, for socialized medicine. The cost of Medicare (or private substitutes) will continue to rise in relative as well as absolute terms. The reason is that advances in medicine increase longevity and with it the number of years in which a person is likely to require expensive medical treatment. It would thus be desirable from a cost standpoint if medical research could be reoriented from extending the lifespan of the elderly to making the elderly healthier. It would incidentally reduce the cost of social security, because workers who become totally disabled before they reach retirement age become immediately entitled to social security. This will become an increasing problem as the normal age of social security entitlement rises from 65 to 67 pursuant to legislation passed by Congress in 1983. But of course benefits must be considered as well as costs. If people value additional years of elderly life at more than the cost of the extension, the cost may be worthwhile, though it doesn’t follow that it should be subsidized. Young people find it strange that such a large fraction of overall medical expenses is incurred in the last few months of life—that is, by people who are dying. (Last-year-of-life medical care accounts for 26 percent of Medicare expenditures and 22 percent of all medical expenditures. PubMed. ) Having nothing to look forward to, why are they willing to spend so much on a meager extension of life? There are several reasons. One is that a good deal of end-of-life medical care is devoted to reducing suffering rather than to extending life. Another reason is uncertainty as to whether one is really dying. Another is that the (private) cost of care, however extensive, is negligible for persons who are covered by both Medicare and private “medigap” insurance that pays for the copayments that Medicare requires. Still another reason for the heavy loading of medical expenses at the end of life is that for people who do not have a strong bequest motive, the opportunity cost of money spent in their last period of life is negligible because they will not be able to spend any money saved during that period.

Comments on Medicare Reform-BECKER

Total medical costs are about 15 per cent of GDP, and are continuing to rise. Medicare is some 20 per cent of this total, and its share will grow significantly in the coming decades as the population ages, and as new medical technologies develop. Many people are under the misperception that aging of the population is the main driver of the growth in medical expenses, but health economists have demonstrated that this is false. The more important reason is greatly increased medical spending at each age, especially at older ages. Expensive treatments and drugs have been developed to treat heart conditions, cancers, and other diseases, to replace and repair hips and other parts of the body, and simply to keep people alive. A reasonable question would be why complain since the value placed on advances in both the quantity and quality of life at older (and younger) ages have far exceeded the increased spending on medical care- my colleagues Kevin Murphy and Robert Topel have demonstrated this in important studies. But the system can be made much better, as long as changes bolster the weak parts of the American medical system, and do not tear down the many strong parts. I concentrate these brief comments on one problem only, the excessive use of hospitalization and expensive surgeries under both private and public systems of payment. One major reason for this excessive use depends on “political” considerations, while the other depends on economic reasons. Politically, it is very difficult to prevent expensive treatments from being used by persons who gain little. To take one of many examples, removal of the prostate after detection of prostate cancer may be the best treatment for a younger person, but makes little sense for someone in his late ‘70’s or 80’s. Yet it is usually impossible to force patients who want that surgery to take instead much cheaper and more appropriate options, such as hormonal deprivation therapy, or doing nothing (“watchful waiting”). Given that the U.S. is unlikely to be able to prevent excessive use of expensive options, we should try to find more approaches that are relatively cheap to use to treat additional patients, even when those patients are better treated in other ways. New drugs and improved understanding of the medical value of proper nutrition may both have high development costs, but they are cheap to extend to additional users, especially after patents expire and cheap generics enter. By contrast, hospitals have relatively constant costs of adding additional patients. So I agree with Posner for this reason mainly, but also for the reasons he gives, that medicare and other medical systems should include drug coverage. The potential of drugs to reduce the total cost of treatment is provided by the evidence on costs of the antidepressants developed during the 1990’s. A recent study in the Journal of Clinical Psychiatry shows that spending on anti-depressants increased from about $400 per depressed person in 1990 to about $1399 in 2000, but total spending per depressed person declined because expensive hospital stays fell by a lot. Moreover, antidepressants also allow many formerly depressed persons to lead reasonably normal lives. Unfortunately, the 2003 Act that introduces drug coverage under medicare has serious flaws that needlessly increase its cost to the very high levels recently revealed by a government recalculation. For persons who elect this coverage, it pays fully up to the first $250 per year of drug expenses, then has no coverage-the famous “donut”- for additional drug expenses in the middle range, and finally it has insufficient coverage at the very high end. The total cost of this program could be significantly cut while eliminating the “donut” and raising high-end coverage by adding a sizeable deductible, perhaps as large as $1000. Incidentally, a not very well understood puzzle is why both private and public systems of medical payments, and also other types of insurance, generally have foolishly low deductibles. Another way to cut excessive use of medical care is to end the free riding by the approximately 40 million uninsured individuals who receive cheap care at emergency rooms of all hospitals, and as in-patients in public hospitals. To prevent that, everyone should be required to buy at young ages private catastrophic medical insurance that can be automatically extended. Medicaid would cover the poor who cannot afford to pay for this insurance (I cannot address the many problems of Medicaid here). Catastrophic insurance provides people with protection against their greatest fear: diseases and disabilities that require expensive treatments which they cannot afford. A third important change would be to encourage tax-free medical savings accounts that allow unused medical balances to be carried over from year to year. The advantages of medical saving accounts with carry over provisions is that they encourage economizing on non-catastrophic medical expenses, which would help take further waste out of the present system. Once these three reforms are in place, we can then start to “privatize” the medicare system for the elderly, except for those elderly who are poor enough to qualify for a government program like Medicaid that pays for their medical needs. The privatization of medical coverage of the elderly would be the dual to my proposal last week to privatize retirement incomes. While reform of pay as you go social security gathers most of the headlines, the value of the looming “crisis” in the medicare system for the elderly is much bigger. Privatizing medicare would prevent that crisis from developing if combined with a system of compulsory catastrophic medical coverage, medical savings accounts, and greater emphasis on treatment by drugs and nutrition rather than by hospitalization and surgery.

Social Security--Posner Response to Comments

Some of these excellent comments put me in mind of the following crude but suggestive way of stating the difference between liberals and conservatives: liberals think that the average person is good but dumb, conservatives that he or she is "bad" (in the sense of self-interested) but smart. Liberals trust the intellectual elite (because they are good) to guide the masses (because they cannot guide themselves); conservatives distrust the elite (because the elite are bad and therefore dangerous) and think the masses can guide themselves. So in the social security debate, liberals oppose private accounts because they do not think the average person competent to manage money for retirement but think government can be trusted to manage it; conservatives support private accounts because they give the opposite of the liberals' answers to the goodness and competence questions. The basic contrast that I have suggested (something of a caricature, I admit) between the liberal and conservative world views has a further implication for the social security debate. Beleving that people are good and therefore never, or at least very rarely, deserve to be poor, liberals favor redistribution of wealth from rich to poor, which a self-financed retirement system would be incapable of bringing about because everyone would be paying for his own retirement rather than for the retirement of others. Conservatives recognize that people can be unlucky, and also (because in the conservative view people are "bad") that the elderly may free ride on their children, and on these grounds support public welfare for the indigent elderly. Several comments take issue with my suggestion that social security is prone to politicization because the elderly vote disproportionately to their percentage of the population. The commenters argue that the young could vote more if they wanted to and if they don't, it suggests that they are content with the status quo. I disagree on two grounds. The first is that the cost of voting is greater for the young because they are more likely to be employed and therefore to have a high opportunity cost of time--not only time spent voting but also time spent studying the candidates and the issues. Second, children are disfranchised. This creates serious distortions in public policy. For example, it would make better sense to subsidize health care for children than for old people, because in the first case one would be adding to the stock of human capital. I have argued that each parent should be given an extra one-half vote for each of his or her children, in order to redress the arbitrary imbalance of political power in favor of the elderly. I would like to underscore a point made by Becker. Compelling and providing are separable. There are good reasons to require people to save for their retirement just as there are good reasons to require children to be educated. But in neither case does it follow that the government should provide the required service. That decision should depend on the relative competence of the public and private sectors in producing particular products and services.